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Business Activity

Introduction to business activity

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BUSINESS/ECONOMIC ACTIVITY

■ Activities that include purchasing, selling, production,

distribution and consumption of goods and services.

■ Activities that satisfy human needs and wants.

■ All activities done to generate income.

■ Performed for some kind of return or profit.

■ Activities done by Farmers, Lawyers, Shopkeepers, etc.

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Business Activity
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What is Business Activity?

■ Businesses produce goods and services. These are the

products of the business.

Which are goods and which are services?

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Goods and Services

■ Goods are things you can touch

■ Services are things that other people do for you

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The purpose of business activity

■ Businesses have been set up to produce goods and

services. These goods and services are supplied to
individuals and other business organisations that want
them.

■ There are many types of business organisations. Some are

major international businesses and others are smaller local
businesses.
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International
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National
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Regional
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Local
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Activity 1

■ List 3 major international businesses and 3

smaller businesses that operate in your own
country and 3 local businesses.
3 MAJOR QUESTIONS INVOLVED!

Economic Activity involves three major questions

■ WHAT TO PRODUCE?

■ HOW TO PRODUCE?

■ FOR WHOM TO PRODUCE?

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Deciding on what to produce

■ Resources found on earth are finite or in limited supply

such as:

Crude oil Gold Aluminum

 PRODUCTION PROCESS

HARVESTED CORN -> PROCESSED -> FINISHED PRODUCT

DIAMOND MINING
 NON-ECONOMIC ACTIVITY

■ Activities done without expectation of money or

anything in return.

■ Done voluntarily or out of interest, love, affection,

compassion etc.

■ EXAMPLE: social service, charity, helping friends

and family, etc.
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Needs and wants

NEEDS

■ Food
■ Clothing
■ Shelter
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Needs and wants

WANTS
■ Luxury Cars
■ Branded Clothes, watches, etc
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Needs and wants
■ What we need and what we want can sometimes be
confusing.

■ Often you say you need a new iPod/mobile device when

in fact you want it rather than need it.

■ Which items do you think people need and which items do

you think people want?
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Demand and effective demand

Our wants influence the way we satisfy our needs. When

you want something, you create a demand for it.

You have decided that you want a new iPhone. What

do you require to satisfy your want?
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Demand and effective demand

■ Your demand for an iPhone will not be successful unless

other people want the same phone too and have the money
and are willing to pay for it.

■ Apple would not make these products if you are the only
person who wants them. The same response applies to
businesses.

■ This is called effective demand. People create effective

demand when enough people want something and are able to
and willing to pay for it.
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Demand and effective demand

■ To satisfy your want you will need money to pay for it as

well as the willingness to spend the money on it. You may
wish to spend the money on something else.
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Activity 2

1. What is the main difference between needs and wants?

2. Make two lists: the first showing the things that you
need; the second listing things that you want.

3. Identify 3 kinds of businesses or organisations that

supply each item on your lists.

4. Select two businesses that you have identified and

explain why you think that they supply the item.
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Activity 2 answers
1. Needs are items that we must have in order to live, whereas
wants are items that we would like to have but which are not
essential for us to live.
2. Own answer. Needs include items such as food, water, shelter
and clothing. Wants might include a certain style of clothing,
a holiday, a mobile phone and so on.
3. Own answer based on items identified in question 2.
4. Own answer based on businesses identified in question 3.
Reasons why the business supplies an item could be:
■ It wants to provide a service
■ It has spotted a demand in the market for the product to make
money.
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The Economic Problem and Scarcity

Definition of ‘scarcity’

The basic economic problem that arises because people

have unlimited wants but resources are limited. Because of
scarcity, various economic decisions must be made to
allocate resources efficiently.
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Scarcity

■ Some resources such as air satisfy everybody’s needs but

most resources are not plentiful enough for this.

■ Although trees are renewable you have to be careful of the

amount of trees cut down taking into consideration of the
time it takes for the replacement tree to grow.
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Scarcity
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Managing scarce resources

■ Since resources to produce goods and services are scarce

a choice must be made to decide what to produce from
them.

■ For example, furniture and houses can be made from

timber so a decision needs to be made whether to
cultivate trees for furniture or houses.

■ Similarly, if a government spends too much money on

building skills then it will not be able to spend much on
training extra doctors
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Activity 3
Think carefully about the following products and answer the questions.

(a) A loaf of bread (b) An oak coffee table (c) a book

1. What are the raw materials that each product is made of?

2. Where do these raw materials come from?

3. If society keeps using these raw materials, will they run out? Explain
your answer.

Definition ‘raw materials’

A material or substance used as an input in the primary production or

manufacturing of a good.
+ Answers
1. Bread is made from flour; an oak coffee table is made of wood;
the book is made of paper.

2. Flour is made from wheat that is grown on farms; wood comes

from trees that grow on the land; paper is made from wood and
other fibres.

3. Wheat and trees are both renewable. This means that as they are
used to make products, new crops of wheat and trees can be
grown. However, while a new crop of wheat can be grown every
year, it takes many years for trees to grow. If these resources
are used to make products faster than they can be replaced,
supplies will run out.
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Business activity and the factors of
production
Business activity involves the use of resources known as
factors of production. These are:

■ Land

■ Labour

■ Capital

■ Enterprise
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Factors of production: land

Land includes all resources that occur naturally. Land is

also the premises of the business.
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Factors of production: labour

Labour is the effort of work provided by people.

Labour-intensive production can often be found in many

developing countries. Labour-intensive production means
labour is plentiful and relatively cheap compared with the
technology available to do the job.

In more industrialised countries such as the UK labour-

intensive production can be more expensive in terms of wages
than the cost of running machinery.
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Factors of production: capital

Capital includes items used in the production of goods and

services made by people. These include:
■ Buildings
■ Machinery
■ Equipment
■ Finance required to purchase these items
Production that uses a high proportion of capital compared to
labour is called capital-intensive. Capital-intensive production
can be seen as a cheaper and more efficient production using
the latest technology than by hand (labour-intensive)
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Factors of production: enterprise

Enterprise is the ability, skill and enthusiasm to take risks

involved in developing a business idea and gathering appropriate
resources.

All businesses combine factors of production to produce goods

and services that people want to buy.

A large company like Kuwait Petroleum Corporation will use all

four elements to produce the final product (petrol or diesel).

1. Land- oil wells and refineries

2. Labour- staff

3. Capital- drilling equipment, pipelines, office buildings

4. Enterprise- the skill of senior management

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What is enterprise?
■ The term “enterprise” has two common meanings.

■ Firstly, an enterprise is simply another name for a

business. You will often come across the use of the word
when reading about start-ups and other
businesses…“Simon Cowell’s enterprise” or “Michelle set
up her successful enterprise after leaving teaching”.

■ Secondly, the word enterprise describes the actions of

someone who shows some initiative by taking a risk by
setting up, investing in and running a business.
+ Business in context
Kuwait Petroleum Corporation (KPC) is one of the world’s largest oil
companies. The company makes products such as petrol and diesel from
crude oil. Crude oil is oil in it’s raw or natural state. It occurs naturally in
deposits within the earth. To produce the petrol that people buy from
garages, KPC must first extract the crude oil from the earth. The company
does this by drilling oil wells, many of which are under the sea. KPC then
transports the crude oil to oil refineries where it is turned into petrol or
other oil products customers want.

Individually answer the following questions:

1. What does KPC produce?

2. Does KPC produce goods or services?

3. Where can you buy KPC’s product?

4. What is KPC’s product made from?

5. Why do you think KPC produces petrol and diesel?

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Business in context
1. KPC produces oil products such as petrol and diesel.

2. KPC produces goods (products).

3. KPC’s product can be purchased at garages and gas or petrol

stations.

4. KPC’s product is made from raw or crude oil.

5. Points to consider could include:

■ KPC has the necessary raw materials in its country.

■ Crude oil was available as a resource in Kuwait. KPC identified it

as a good business opportunity and noticed a demand for it in the
market. They also have the skills and the means to extract the
resource which is why KPC decided to produce petrol and diesel.

■ There is a market for the product.

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Cost and opportunity cost
■ If you want an iPod and a pair of shoes but only have enough money to
buy one of them, you will have to choose which one to buy. Both products
cost money and that is their financial cost.

■ There is also an opportunity cost – the possibility of buying and enjoying

the use of the other item.

■ If you buy the iPod, the opportunity cost of the iPod is the shoes

■ If you buy the shoes, the opportunity cost of the shoes is the iPod

■ Here's another example: if a gardener decides to grow carrots. His or her

opportunity cost is the alternative crop that might have been grown
instead (potatoes, tomatoes, pumpkins, etc.)
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Village fisherman

Land:

Labour:

Capital:

Enterprise:
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Adding Value
Added value = the difference between the price of the finished
product/service and the cost of the inputs involved in making it.

This is because of the work carried out increases the value of the parts and
raw materials used. When the product is complete its value and the price it
is sold at is more than the value of the factors of production used to make
the product.

So added value is the increase in value that a business creates by

undertaking the production process.
Consider the examples of new cars rolling down the production line being
assembled by robots. The final, completed and shiny new car that comes off
the production line has a value (price) that is more than the cost of the sum
of the parts. Value has been added. Exactly how much added value is
present, is determined by the price that a customer pays.

Alternatively, imagine a celebrity chef preparing a meal at his luxury

restaurant. Once the cooking is complete, the meal is being served and sold
for a high price, substantially more than the cost of buying the
ingredients. Value has been added.
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Activity 4
Consider one of the following businesses:

■ a farm

■ a furniture maker

■ a shop

■ a cosmetics manufacturer

■ a paper producer

■ a producer of music CDs

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Activity 4
Construct a table like the one shown below. Complete your
table with examples of the types of resources or factors of
production used by your selected business. The first line of the
table has been completed as an illustration.

Factors of production
Business Land Labour Capital Enterprise
Farm Land for Farm Tractors Skills and
grazing workers efforts of the
animals farmer in
or setting up and
growing running the
crops farm
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Adding value
You don’t have to use robots or have the culinary skills of Gordon Ramsay to
“add value”. For example, businesses can add value by:

■ Building a brand – a reputation for quality, value etc. that customers are
prepared to pay for. Nike trainers sell for much more than Hi-tec, even
though the production costs per pair are probably pretty similar.

■ Delivering excellent service – high quality, attentive personal service can

make the difference between achieving a high price or a medium one.

■ Product features and benefits – for example, additional functionality in

different versions of software can enable a software seller to charge higher
prices; different models of motor vehicles are designed to achieve the same
effect.

■ Offering convenience – customers will often pay a little more for a product
that they can have straightaway, or which saves them time.

■ A business that successfully adds value should find that it is able to operate
profitably because adding value is where the selling price is greater than the
costs of making the product.

Do not confuse added value with profit as they are not the same
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Adding value Why would people pay a bit more
money for a loaf of bread than make
it at home?
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Summary
Supplying
Effective
needs and Demand
demand
wants

Opportunity
Scarcity
cost
Goods and
services

What is Land
Resources
business?

Adding value Labour

Factors of
production

Selling price
Capital
minus cost

Enterprise
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Private sector: private businesses and
enterprises
Private Sector: Business activity owned financed and controlled by
private individuals
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Private sector

■ Self-employed traders

■ Professional firms

■ Small and large businesses

■ International companies
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Public sector: businesses owned and
run by the government are public
enterprises
Public Sector: Business Activity owned, financed and controlled
by the state through government or local authorities
■ Government – key departments set policy and monitor
implementation
■ Local Authorities – County Councils, District Councils

■ Schools

■ Hospitals

■ Libraries

■ Public Corporations – BBC

■ Transport
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Non-profit-making: a third type of
enterprise
Non-profit-making organisations include charities and
voluntary organisations.

These organisations are set up to fulfil a perceived social need

or to provide help to a specific section of the community.
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Similarities and differences

■ Non-profit-making and public sector organisations have

profit as a high priority

■ The difference between these two is that public sector

organisations is run by or on behalf of the government
whilst non-profit-organisations could easily be set up by
private individuals who want to support a specific cause.

■ The government focus on enriching society and ensuring

a basic standard of living
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Similarities and differences

■ The difference between these two is that public sector

organisations is run by or on behalf of the government whilst
non-profit-organisations could easily be set up by private
individuals who want to support a specific cause.

■ The government focus on enriching society and ensuring a

basic standard of living

■ All organisations in the public and private sector are involved

in some form of business activity and it is only their objectives
that differ. For example: what, whom and why they produce
goods and services.
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Summary
1. We all have needs and wants.
2. The main purpose of business activity is to supply the goods and
services people want.
3. The objective of most private sector businesses is making a
profit.
4. The main objective of public enterprise is to provide services to
the local and national community.
5. The main objective of non-profit-making organisations is to meet
a perceived social need or to provide help to a specific section of
the community that is not met by private or public enterprise
6. Businesses produce goods and services using scarce resources
known as factors of production: land, labour, capital, enterprise.
7. Value is added to the resources because of the work carried out
to produce the finished product has a value that increases the
value of the parts and raw materials used.